Profit margin rate: definition, formula and calculation
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Do your reports mix margin rates and markup rates?
Schedule a meetingLearn about our pricing analysisThe profit margin is the percentage of profit calculated on the purchase price excluding VAT : (selling price excluding VAT − purchase price excluding VAT) ÷ purchase price excluding VAT × 100. It indicates the profit generated by each euro invested in the merchandise. It should not be confused with the markup rate, which is calculated on the selling price and is always lower.
The Essentials in 6 Questions
The margin relative to the purchase cost , as a percentage.
Purchasing, management control , traders, pricing.
In every supplier negotiation and in profitability reports.
By reference , category or supplier.
To measure the return on investment for each euro invested in stock .
Margin ÷ purchase cost excluding VAT × 100 .
Formula and calculation of the margin rate
One formula to measure the rate, one to set a price based on it, one to convert it into a markup rate.
| Need | Formula |
|---|---|
| Measuring the profit margin rate | (Selling price excluding VAT − Purchase cost excluding VAT) ÷ Purchase cost excluding VAT × 100 |
| Set a price based on a profit margin rate | Selling price (excluding VAT) = Purchase cost (excluding VAT) × (1 + Margin rate) |
| Switch to markup rate | Markup rate = Margin rate ÷ (1 + Margin rate) |
The gross margin rate refers to the same thing in retail: the gross margin (sales of goods − cost of goods sold) divided by the cost of goods sold. To set a price based on a target gross margin rate, see the section on calculating the selling price .
Example of calculating the profit margin rate
An item bought for €20 excluding VAT and sold for €50 excluding VAT has a margin rate of 150% and a markup rate of 60%.
margin: €50 excluding tax − €20 excluding tax.
margin rate: 30 ÷ 20.
Brand rate: 30 ÷ 50.
The profit margin exceeds 100% as soon as the selling price is more than double the purchase cost.
Margin rate or markup rate: which one to use?
Purchasing often focuses on cost, retail on selling price: the key is never to mix the two.
| Brand rate | Equivalent margin rate |
|---|---|
| 20% | 25% |
| 25% | 33.3% |
| 30% | 42.9% |
| 40% | 66.7% |
| 50% | 100% |
French retailers most often set their objectives based on markup , because teams work from the displayed price; the margin rate remains common in supplier negotiations and with wholesalers. Both measure the same difference in euros: the gross margin .
The 3 common mistakes with the profit margin rate
Mixing up the basics, forgetting about discounts, or managing solely by percentage.
- Comparing a margin rate to a markup rate : a target of 40% does not have the same meaning depending on the basis, and the difference distorts any reading of profitability.
- Calculate based on the supplier's catalogue price : the correct basis is the actual purchase price, after discounts and benefits have been deducted.
- Managing solely by percentage : a high rate on a low-selling item yields less than a modest rate on a high-volume product; the margin in euros must also be monitored.
Frequently Asked Questions
Short answers to the most frequently asked questions about profit margin rates.
What is the profit margin rate?
The markup rate is the percentage of profit calculated on the purchase cost excluding tax: (selling price excluding tax − purchase cost excluding tax) ÷ purchase cost excluding tax × 100. It indicates the profit generated by each euro invested in the merchandise. A product purchased for €20 excluding tax and sold for €50 excluding tax generates a €30 profit margin, representing a markup rate of 150%. This is the preferred indicator for purchasing departments and wholesalers, who base their decisions on cost. Retailers, however, more often use the markup rate , calculated on the selling price.
How do you calculate the profit margin rate?
To calculate the profit margin, divide the profit margin by the purchase cost (excluding VAT), then multiply by 100: profit margin = (selling price excluding VAT − purchase cost excluding VAT) ÷ purchase cost excluding VAT × 100. Example: purchased for €10 excluding VAT and sold for €14 excluding VAT, a product generates a profit margin of €4, representing a profit margin of 40%. To find the selling price from a target profit margin, reverse the formula: selling price excluding VAT = purchase cost excluding VAT × (1 + profit margin). All amounts are calculated excluding VAT and based on the actual purchase price.
What is the difference between margin rate and markup rate?
The difference between margin rate and markup rate lies in the calculation basis: the margin rate relates the margin to the purchase cost excluding VAT, while the markup rate relates it to the selling price excluding VAT. For the same margin in euros, the margin rate is therefore always higher. A product bought for €10 excluding VAT and sold for €14 excluding VAT has a 40% margin rate but a 28.6% markup rate. Comparing a target expressed in one calculation method with a result expressed in the other distorts the entire profitability assessment.
What is the gross profit margin?
The gross margin rate is the margin rate applied to trading activity: the gross margin, that is, the sales of goods minus the cost of goods sold, divided by that cost. It measures the profitability of the buying and reselling activity, before overhead costs. It is the key performance indicator for trading companies in their financial statements. For details on calculation methods and common pitfalls, see the guide to calculating gross margin .
Can a profit margin exceed 100%?
Yes, a profit margin can exceed 100%: the selling price (excluding VAT) simply needs to be more than twice the purchase price (excluding VAT). A product bought for €20 (excluding VAT) and sold for €50 (excluding VAT) thus has a profit margin of 150%. This is common in clothing, beauty products, and accessories, where markup is high. The markup rate, however, can never reach 100%, as that would require a zero purchase cost. This is yet another reason to always specify the basis when announcing a profit margin percentage.
How to go from a margin rate to a markup rate?
To convert from a margin rate to a markup rate, the formula is: markup rate = margin rate ÷ (1 + margin rate). A margin rate of 50% thus corresponds to a markup rate of 33.3%, and a margin rate of 100% to a markup rate of 50%. Conversely, margin rate = markup rate ÷ (1 − markup rate). These conversions are primarily used to reconcile purchasing figures, which are based on cost, with pricing figures, which are based on the selling price.
Key Takeaways
- Margin rate = margin ÷ purchase cost excluding tax ; markup rate = margin ÷ selling price excluding tax .
- For the same margin, the margin rate is always higher and can exceed 100%.
- Always start with the actual purchase price and also track the margin in euros .
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